Under New Michigan Law, Bankruptcy is an Option for Cities

Michigan’s lawmakers passed new legislation that expands a local government’s options in bankruptcy.  Under the state’s old law, only an emergency manager, with the governor’s permission, could declare bankruptcy on behalf of a government entity. The new legislation allows for a local government to file Chapter 9 earlier in the process. The governor still needs to provide final approval, but in light of Detroit’s financial woes, legislators determined that other options should be available to assist in resolving Detroit’s insolvency. SB 865 provides that if a local government is in a state of financial emergency, the governing body has seven days to select one of four options:

  1. Opt for a consent agreement with the state;
  2. Appoint an emergency manager;
  3. Begin a neutral evaluation process with a mediator; or
  4. File for Chapter 9.

The law also gives the local governing body and the mayor the ability to vote out an emergency manager after one year and replace the manager with a mediator. If signed into law by Governor Rick Snyder as expected, the legislation will take effect in late March.

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